Economic Impacts Of El Nino
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|Economic Impacts (to get us started)|
Item 1 16-MAR-1998 19:40 Tony Michaels (tmichaels)
Although I am not an economist, I have been working with international businesses on some of the economic impacts of climate variability. El Nino is an obvious source of natural climate variability and it comes up often in this context. Here are a couple of observations that I will just throw out into the Breakout group to see if people are interested in following up on these threads.
1. Our perception of El Nino and other sources of climate variability is skewed towards the negative because of both the media and societal fascination with disaster. The media reports losses, but it is much more difficult to follow up on the gains.
2. For the U.S., El Nino is a net benefit on average. This is primarily because of the reduction in hurricane losses. In a strong El Nino, there is about a 4 fold reduction in the probability that a Category 2 or larger hurricane will make landfall in the U.S. This results in a net "benefit" of many $Billions during each El Nino year. If people are interested, we can follow through on this calculation to see how to estimate the "benefit" from the probabilistic absence of a loss.
3. As has been mentioned in other discussions, new patterns of rain and drought (two well monitored changes due to El Nino) can be both a benefit and a cost. In California, there is a large cost associated with the flooding and storm damage from large storms. However, even in California, the rain will provide enhanced sources of water for agriculture and drinking and the snow-pack means that the ski areas have a banner year. The milder winter (on average) in the north eastern U.S. has implications for energy use. Rain in the southeast affects the likelyhood of fires (Jim O'Brien will cover this). From an aesthetic standpoint, the desert wildflowers will bloom like they haven't in a century.
4. For many areas in the rest of the world, El Nino may be a net economic negative (though the balance is rarely explicitly calculated). However, these areas incur a benefit during the opposite phase of the ENSO, the La Nina. Calculating the economic costs of one phase of an oscillation is probably too short of a time-scale.
5. The biggest issue with El Nino is that our social and economic structures are not build to handle the range of natural variability that nature can exhibit. An extreme El Nino makes that challenge more obvious. This is an issue for building a sustainable world. It is also an issue when comparing natural climate variability with that caused by additional greenhouse gases.
6. Forecasting of climate also has benefits and costs. As is seen in California, the forecast of a lot of strong winter storms allowed people to prepare and certainly reduced some of the economic costs of this event. However, some of the forecast models do not do as good of a job and in cases where forecasts are a bust (which is bound to happen sometimes), the "preparation" might be a cost that is not balanced by a benefit.
7. One other implication of accurate climate forecasts is that they reduce the uncertainty of climate in many finance markets (commodities, energy, futures markets, catastrophe bonds). This reduction in uncertainty will make these markets less volatile (if we can plan or price for the forecast changes). Lower volatility means lower profits for the people who trade them (the market becomes more efficient for that source of variability). This benefits some people and obviously hurts others.
I hope that these sometimes provacative observations get people thinking about economic issues. As questions come in, I will try to use them as a lever to get discussion going about these issues.
Lots of thought-provoking comments, Tony! I had not really even thought much about the fact that fewer hurricanes were an overall benefit of El Nino. What % fewer hurricanes occurred during this past hurricane season? Would that effect occur similarly in the Atlantic and Gulf (southeast US) as well as in the Pacific (Mexico, etc)?
I would be interested in reading more about El Nino and its indirect effect on the stock market. Do you know any articles that I could read about this topic?
The ENSO - hurricane impact variability is largely statistical. If you look at the average frequency of hurricane landfalls in the Coastal US by storms of Cat 2 or greater in strong El Nino years it is about 0.5 per year. In La Nina years it is 2 per year. This difference is statistically signficant. A landfall of a strong storm is about 4 times as likely. However, that one storm landfall every other El Nino year can still be a doozy! Looking at more specific details of this (Gulf vs Atlantic Coast) gets harder. Even though there are obvious patterns, the sample sizes are so small that the statistics never show signficance. It appears from a non-statistical look at the data that weak storms in the Gulf may be more common in El Nino years. These can cause a lot of flooding but relatively little wind damage. Since we are only accruing more data one year at a time, it seems like numerical modelling is probably the only way to take this kidn of analysis to the next level (or wait another 100 years to double the empirical sample size!).
I don't know of any good El Nino - stock market papers off the top of my head. I will look around. This is also a tricky area, since if people really know something like this, they tend to use it to make money rather than publish papers! Mark Johnson (University of Alaska Fairbanks) once did an analysis of the ENSO signal in orange futures markets. Unpredicted fluctuations in supply from variability in rainfall should have lead to fluctuations in price. He saw a huge and predictable signal in the pricing before 1990. After that, the signal disappeared (even though the ENSO did not). The speculation was that the introduction of neural net technology to the markets about this time may have made the markets effcient for this source of variability. Neural nets are used by some to forecast El Nino. If you use them to forecast commodities prices, they may learn the ENSO signal in the pricing data. Once a signal if predicted by a large part of the market, the market becomes efficient with respect to that source of variability and it stops causing such large price fluctuations.
Interesting info about neural nets and forecasting El Nino-thanks!
Tony--What about all the tornadoes they have been having in the east? Is the monetary toll mounting anyway? How does loss of life compare with the hurricanes and the tornadoes?
Jim O'Brien, the next speaker in this series, and his students have done some excellent work on the effects of El Nino on tornadoes. There are distinct regional changes in the probability of tornadoes. He even finds a new "tornado alley". He has much of this on his web page and probably will cover the topic.
In the U.S., tornadoes probabl cause a larger loss of like than hurricanes in todays world. This is mostly because we can forcast hurricane landfall with enough notice to evacuate people. Tornado warning is still very short. THe U.S. also has lots of tornados, while they are pretty uncommon in the rest of the world. In areas like the indian ocean where the hurricane warning system is less well developed and the ability to evacuate is poorer, the loss of life from a hurricane can be massive.
On the economic side, the property loss from a hurricane is much greater than the sum of tornadoes. The potential loss is also many orders of magnitude higher. We still haven't ever had a major hurricane strike on a city with todays population density. This could cause economic losses of $100-200 billion.
The other issue with El Nino effects is that they are redistributions for tornadoes. In other words, the numbers increase in some places and decrease in others. I don't think that the national average impact changes that much (though Jim will have more recent information). With hurricanes, the probability drops during an EL Nino and the reduced risk is probably present for most of the easter U.S. and Gulf Coast. There were some odd storms that got up to California last year, but that did not cause much damage. For hurricanes, the tradoff comes with a La Nina or El Viejo year when the probability goes up.
All of these statistics are still scant consolation for the people that are affected by hurricanes or tornadoes (or floods in CA). The average chances may be higher or lower, but if the improbable event hits you, it still hurts! I think that these kinds of mortality and economic information are best used for planning. That is what makes the ENSO forecast so useful is that the lead time is sufficient to allow for some mitigation (though for some things, there can be no mitigation).
Reported out from the U.S. Senate yesterday (March 26): the Senate has agreed on a disaster assistance fund for California containg $190 million for storm-torm roads, levees, farms and military facilities. The disaster aid bill is expected to win final Senate approval today, as part of an emergency spending measure that includes several other items, including military expenditures in Bosnia and the Persian Gulf (shows the high profile that El Nino has in the U.S. legislature).
The Senate has estimates of $500 million in El Nino-related storm damage, with disaster declarations in 41 out of 58 California counties. (This doesn't look that huge in light of past annual disaster bills of up to $1 billion for floods, fires and earthquakes in California.) The new funding will pay for rehabilitations projects ranging from Sacramento's washed-out Suisin March levee to the battered I15 in San Diego County.
Senator Barbara Boxer was largely responsible for Senate approval of an amendment that would waive a $100 million annual cap for each state's emergency highway money; California will exceed that limit by $26 million because of heavy damage to freeways and local roads caused by the record-setting rainfall. Among hardest hit roadways are Calif. 1 in Monterey and Ventura Counties, I15 in San Diego, and Calif. 25 in San Benito County, all suffering damage from flooding.
Some of the disaster aid would go to California agriculture, which has been severely affected. Strawberries, alfalfa, wheat, and celery have all been affected (along with the loss of much of the artichoke harvest and the cancellation of Gilroy's Garlic Festival). Livestock losses include 2,400 milk cows, 54,000 chickens and other poultry and 250 sheep. The disaster bill earmarks $2 million in emergency loans for farmers and ranchers in Calif., $2.4 million for lost milk production and cattle, and $3.1 million for damage to watersheds.
The U.S. Army Corps of Engineers would receive $25 million to clear and maintain navigational channels in Marina Del Rey, Port Hueneme and Oceanside Harbor, among other sites. Additional funds are slated for repair to national parks and wildlife refuges.
FEMA will receive $1.6 billion in the disaster bill to restore disaster accounts depleted in recent months and to pay for additional damage in 1998. The disaster bill, which covers ice storms in the Northeast, tornadoes in the Southeast, flooding in the West, and a typhoon in Guam, has strong bipartisan support, although some legislators are concerned about the spiraling costs of disaster cleanup and there is growing interest in revamping the incremental way that the federal government handles disaster relief.
In considering the benefits of this El Niņo, let's not forget the fuel savings for people across the northern tier of US states and adjacent Canada. Because of the exceedingly mild winter, heating costs have been much lower than normal. This has even pushed down the cost of fuel oil, reducing gasoline prices all over the US. I do not have any figures handy, but I did hear an analysis that indicated the fuel cost savings alone were greater than the total tax cut proposed by the Republican party.
Mark--That is noteworthy. I am appreciating the savings on my Washington Gas bill!